Seen from emerging countries, the surge in the dollar is dizzying. Since the beginning of 2022, the greenback has appreciated by 39% against the Ghanaian cedi, by 28% against the Turkish lira and by 45% against the Sri Lankan rupee. In August, the World Bank calculated that emerging currencies had lost an average of 11% of their value against the dollar since January. In other words, each good imported in US currency saw its price increase by 11%.
This rise comes on top of the rise in the cost of food and energy observed since the start of the war in Ukraine on February 24, and is fueling soaring prices in developing nations, further weakening the poorest. “Companies in these regions spend more on their imports, which risks reducing their investments”, notes Marcello Estevao, head of the macroeconomics, trade and investment department at the World Bank. The only positive note: the devaluation of the currencies of low- and middle-income countries strengthens the competitiveness of their exports to the United States.
The appreciation of the dollar, which has often been accompanied by financial storms, has left only bad memories for emerging countries. In 1994, the sharp hike in Federal Reserve (Fed) rates triggered capital flight from Mexico, a rapid depreciation of the peso against the greenback, and ultimately a contraction in Mexico’s gross domestic product (GDP). . A few years later, in 1997 and 1998, the “tigers” of Southeast Asia (Thailand, Malaysia, Philippines, Indonesia, etc.) were in turn caught in the turmoil. In 2013, the prospect of a tightening of US monetary policy panicked investors, who repatriated their capital to rich countries.
The strong dollar has long been the weakness of emerging countries. They need to go into debt in the American currency to finance their development, but find themselves at the mercy of the monetary policies of the Fed. However, lessons from previous crises have been learned. “They have developed, particularly in Asia, their bond markets in local currencies to be less dependent on the dollar and their central banks have strengthened their foreign currency reserves in order to better resist capital outflows”explains Julien Marcilly, chief economist at the consulting firm Global Sovereign Advisory.
Destabilization of small or vulnerable economies
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